Report: Apple, Microsoft lock horns over iOS Office revenue split

Apple and Microsoft are arguing over the iOS App Store's submission and payment requirements, and Microsoft has already made concessions as it tries to get its SkyDrive app approved, support discussions show.

The dispute may also have implications for Microsoft's Office iOS apps, which are believed to be in the works. On Tuesday, the Wall Street Journal's AllThingD blog reported that the firms were at loggerheads over compensation issues regarding Office on the iPad and iPhone.

On Monday, The Next Web, citing anonymous "sources close to Microsoft," said that Microsoft had not been allowed to update its SkyDrive iOS app since June, when Microsoft gave customers the option of buying additional storage beyond the free 7GB allotment.

The two companies could not agree on what, if anything, Apple was owed by Microsoft for revenue generated by additional storage plans. According to App Store policy, Apple takes 30% of all app revenue, including in-app purchases. The Cupertino, Calif. company may have argued that it was due the portion of all SkyDrive storage sales credited to iOS users.

It wouldn't have been surprising if Microsoft declined, if only because it couldn't guarantee that someone who paid for more storage used that space solely from an iPad or iPhone.

Microsoft confirmed the delay of a SkyDrive app update, but wouldn't go into specifics. "Similar to the experiences of some other companies, we are experiencing a delay in approval of our updated SkyDrive for iOS," a spokeswoman said in an email yesterday. "We are in contact with Apple regarding the matter and hope to come to a resolution."

Microsoft's developer support staff, however, hinted at the real reason for the logjam.

On several threads in the Live Connect Developer Center, developers reported that their iOS apps had been rejected because the apps included a SkyDrive log-in feature. According to the developers, Apple cited a rule that bans purchases or subscription sign-ups outside the app itself.

"Apps that link to external mechanisms for purchases or subscriptions to be used in the app, such as a 'buy' button that goes to a Web site to purchase a digital book, will be rejected," Apple told one developer, reciting section 11.13 of the App Store Review Guidelines.

Apparently, Apple interpreted the rule as applying to any third-party app that requires users to log into their SkyDrive account via Microsoft's SkyDrive website. "A few days ago, our last update was rejected by the Apple review team because of the presence of the 'Sign Up' button in the Live login authorization page," wrote Olive Toast Software on Aug. 9.

A day later, Dare Obasanjo, whose profile identified him as a Microsoft employee, replied on the same support thread, noting that Microsoft had already made concessions to Apple. "We recently removed some links to upgrading your SkyDrive from the 'sign up' experience," said Obasanjo, who then asked Toast when they had submitted the app update to Apple.

Instead, Olive Toast, a two-man Scottish app shop, created a workaround to hide the "Sign Up" button on the SkyDrive page. That must have been enough for Apple; Olive Toast's File Pro was last updated in the App Store on Nov. 3, and does support SkyDrive.

In October, another developer posted a similar complaint on a support forum, claiming his iOS app was also bounced for the same violation.

Microsoft was aware of the problem as far back as February 2012, when in a "Known Issues" list for the Live Connect SDK, Microsoft said, "Apple has rejected iOS apps that integrate with Live Connect because the Microsoft account login page contains a sign up link, which could potentially take user to a page to purchase more SkyDrive storage."

In late October, another Microsoft employee said the issue had still not been resolved. "We are aware of this rule," wrote Shelly Guo. "Microsoft is in active discussion with Apple on this issue. However, there is no ETA on the resolution timeline at this point."

According to reports, the same problem has plagued plans to release iOS apps for Microsoft Word, Excel and PowerPoint, the three parts of the Office suite that most believe will move to the iPad and iPhone.

Yesterday, AllThingsD, saying it had talked with "sources familiar with the ongoing negotiations," claimed Apple wanted its 30% commission on any Office 365 subscriptions sold through the Office iOS apps.

Office 365, slated to refresh in early 2013 with new subscription plans for consumers and small businesses, lets customers install the Office software on up to five computers and devices. Analysts have predicted that Microsoft will offer limited iOS Office apps free of charge, but unlock their full feature sets only when they are tied to a paying Office 365 subscription.

AllThingsD's sources said that Microsoft was pushing Apple to adjust the App Store's 70%/30% revenue split, but that Apple wasn't budging.

That didn't surprise Wes Miller, an analyst with Directions on Microsoft, a research company that tracks all of Microsoft's move.

"Apple wants its cut," said Miller. "They're pretty firm about the 30%. Amazon tried to get around it, but couldn't."

Apple has made its subscription policy clear. In the App Store guidelines, item 11.12 states, "Apps offering subscriptions must do so using [In-App Purchase], Apple will share the same 70/30 revenue split with developers for these purchases."

If Microsoft caved, Apple could be looking at a gold mine: The consumer Office 365 costs $100 annually, while the small business version runs $150 per user per year.

But Microsoft's in a tough spot, and may be forced to swallow Apple's 30%.

"There are two conundrums here for Microsoft and Office," said Miller. "One, while there's an almost unspoken rule that the iOS apps will sell at some kind of price, Microsoft may not be able to charge what Office is worth."

App Store prices are notoriously low, and higher-priced software is rare. Apple sells its application apps -- Pages, Numbers and KeyNote -- as an alternative to Office, charging $10 each. Even that's high for the App Store.

But if Microsoft charges more -- something Miller argued could be justified -- to the tune of $15 or $20 an app, iOS customers would likely balk.

Second, and more important, said Miller, is that Microsoft wants to move all Office customers off "perpetual" licenses that let customers use the software indefinitely for a one-time, up-front fee. Instead, it would like to shift customers to a software-by-subscription model with recurring payments.

Most enterprises already pay for Office using subscription-style licensing agreements, called Software Assurance. In fact, those agreements account for the bulk of Office revenue. But Microsoft is pushing Office 365 subscriptions even to those large customers. "Microsoft seems to want to move everything to subscriptions," observed Miller. "They're really trying to get everything to subs."

His point: If Microsoft wants badly enough to tie iOS Office to Office 365, it will pay Apple's 30%.

But he warned that the longer Microsoft holds out, the worse position it puts itself in. "The longer they go, the more they train users to do without Office on the iPad," Miller said. "Users will be de-conditioned, so Microsoft should move quickly."

Miller acknowledged that the picture is cloudy. "It's too hard to know one way or the other. There are all these moving parts," he said.

Meanwhile, the clock is ticking. Office 2013 and the new Office 365 subscription plans are likely to launch late next month or in early February, while Office for iOS is expected to debut in late February or early March.

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